Michael Giberson
The post title was extracted from the conclusion of Henry Neilson’s article, “Price gouging versus price reduction in retail gasoline markets during Hurricane Rita” (Economic Letters, October 2009), but I’m not sure the evidence supports the conclusion of altruism.
Neilson collected gasoline price data in the Byran-College Station, Texas, area for several weeks after Hurricane Katrina, a period which included Hurricane Rita. He uses his data from before and after Rita to examine whether gasoline station owners took advantage of the market disruption (which led to evacuations from Houston, with some evacuees moving to or through the area under study) to engage in price gouging. He found retail price margins fell during the period right around Rita, leading to Neilson’s conclusion: “not only was there no evidence of retail price gouging, but that there was actually evidence supporting the opposite. Gas station owners were surprisingly altruistic during that time of crisis.”
While the evidence presented doesn’t suggest price gouging, I think Neilson is way too hasty in his conclusion of altruism. Four issues arise:
First, It is worth noting that Texas has an anti-price gouging law. Before Rita hit Texas, the Texas Attorney General was in the news warning businesses against price gouging:
“I have instructed my investigators and attorneys to take quick legal action if we find businesses deliberately gouging consumers in advance of this storm and in its aftermath,” said Attorney General Abbott. “We will aggressively urge the courts to impose harsh penalties against anyone who would profit off the backs of those already suffering.”
Similar warnings were issued after Hurricane Katrina, just a few weeks earlier. So was it altruism or fear of harsh penalties imposed by the state? Neilson doesn’t mention the anti-price gouging law or the pre-Rita warnings from the Attorney General, and no evidence in the article allows us to discriminate between the possible explanations.
Second, asymmetric price adjustment in gasoline markets has been studied extensively; it is fairly well established that retailer margins usually fall during times of increasing wholesale prices, and retailer margins increase during times of falling wholesale prices. Since Neilson documents a period during which wholesale prices increase and he observes that retailer margins fall, we could conclude that this is just another episode of asymmetric price adjustment. What’s love got to do with it?
Third, Neilson doesn’t directly observe retailer margins. Instead, he observes posted retail prices and infers margins by comparison to wholesale spot prices (netting out taxes). But frequently gasoline stations are supplied under contracts which do not directly expose them to wholesale spot prices, and therefore margins may not have fallen to the extent suggested, and possibly not at all for some retailers.
Finally, Neilson reports that several stations ran out of gasoline supplies during the period (“For most of the collection period, the value of the variable Number of Stations without Gas was equal to zero, except from September 23 through September 28. At one point in the collection period seventeen of the stations had run out of gas simultaneously.” Emphasis added.) Seventeen out of 28 stations – sixty percent – without supplies! So, perhaps coincidentally, on the day the Attorney General is in the news warning against price gouging, stations in the area begin running out of supplies.
Neilson suggests the episode offers “evidence consistent with Rotemberg’s (2006) fair pricing model among gas station owners in Bryan/College Station, Texas, during Hurricane Rita.” As previously noted on this blog, I think Rotemberg raises interesting issues but I’m not impressed by his attempts to resolve those issues. In any case, it seems at least problematic to attribute the observed behavior to fairness or altruism. Competing parsimonious explanations exist, but were not compared to Neilson’s altruism-based explanation.
And, independently of whether or not gasoline station owners intended to be altruistic, the question arises whether economic welfare would have been helped or hindered by a larger increase in price. September 23, 2005, the day before Hurricane Rita hit the Texas coast, was a day many people were evacuating coastal areas. Demand is extraordinarily high in the Bryan/College Station gasoline market at the time; supplies may have already been impaired somewhat by Hurricane Katrina’s effects on the Gulf region. In this market, according to the evidence presented, stations kept prices low and several ran out of supplies. How many evacuees and local residents would have been better off finding gasoline available at slightly higher prices?
I should have titled this post: Another case of the predictable consequence of anti-price gouging laws. (See related posts.)